Discussions of annexation agreements, impact fees, and other proposed development costs are nothing new to the agendas of city officials in Sugar Grove, Ill., especially when it comes to the Kimball Hill Homes community of Settlers Ridge, which has been in development since 2005.

But as the Village Board and staff gathered in late July, the tone of discussion had shifted greatly from its original tenor. What could once have been described as a "How much can we get?" attitude instead sounded more like "How can we hang on to what we have?"

Across many of the nation's fast-growth markets, municipalities have come to enjoy the ability to expense their growth through impact and development fees aimed at home builders and due upon permitting.

Impact fees are unique because they serve as both a financing and a regulatory tool. First, the revenue they generate buffers citizens from having to endure tax increases for infrastructure needs and new city amenities and services. Morever, it sits and accrues additional interest, since the fees are due prior to the actual impact costs being incurred.

While the intent behind impact fees originally was to have new developments pay for themselves, the run-up in municipal expectations became overheated in some markets during the boom. As a result, many builders–who, in turn, passed fees on to home buyers–pointed to increasing restrictions and the fast-rising fees as direct contributors to the affordable housing crisis.

According to research conducted last year by Austin, Texas-based impact fee consulting firm Duncan Associates, an average of $10,500 in impact fees per house is found among the markets where use is prevalent. But those costs fluctuate widely, with fees climbing over $100,000 per home in some California locales.

With the residential market on the skids, new-home builders are now looking to cities for breathing room from fees and development requirements that, amid land write-downs and bank workouts, have become suffocating.

"We have heard a lot of discussion about lowering or suspending fees to spur building," says Clancy Mullen, the director of infrastructure finance at Duncan Associates. "A lot of builders are getting desperate and, in turn, getting vocal about asking for relief." Mullen cites Florida, Las Vegas, and Phoenix as the most extreme cases.

Chicago is another market where builders feel that municipal expectations have gotten out of hand. As builders moved farther out into the greenfields to find affordable, developable land, they were commonly expected to enter into annexation agreements in order to secure city services.

In the Settlers Ridge project, the annexation between the city and Kimball Hill committed the builder to road improvements in the surrounding area as well as the construction of a bridge.

When the agreement was struck, the project expectations were for 2,470 homes on 1,300 acres during a 10-year span. Settlers Ridge was lauded for its implementation of traditional neighborhood design and thoughtful, environmentally focused land planning. In 2006, it was chosen for the Chicago area's Parade of Homes event.

But in April 2008, Kimball Hill declared bankruptcy. By June, the company had announced it was ceasing operations in Settlers Ridge as well as two other area developments. One hundred homes have been built to date.

Now, as the community is being offered for sale, developers are requesting reductions in both fees and off-site improvement requirements, along with amended or reduced development standards. The city is considering breaking up its annexation agreements in an effort to let other developers get control of tracts within the project.

"It happened because it was easier, and [municipalities] knew they could get it," says Buz Hoffman, CEO of Lakewood Homes. "When times were so good, builders were paying anything just to get pieces of property zoned. Today, the fees have to change. And hopefully a catalyst for this will come as municipalities are looking at budgets. Right now, they see that what was once flush with home builder fees [no longer is]. They are cutting staff drastically, and at some point, they have to come to the recognition that something is better than nothing."

Without some give and take, builders speculate that struggling projects can easily remain tied up for years, wielding serious negative effects on surrounding communities.

Dave Faganel of local builder R.A. Faganel is active in Southbury, a community located in the Chicago market's southwest suburb of Oswego. Though Southbury is doing better than others in the area, it certainly isn't performing at the rate that was expected during the approvals process. Compounding the pressures, a tract of land abandoned by bankrupt Neumann Homes sits in the project's center like a hole in a doughnut.

"There are a lot of things that make it expensive to build a house," says Faganel of all the pressures amid slowing sales. "We have a lot of infrastructure that needs to get paid for, but at the same time, the city needs us to be successful. We need to work together on some concessions."

In Faganel's mind, that means getting the community's current homeowners involved. "They are really able to start a grassroots effort," he says. "They have the ear of the city. They can push the city so we don't end up with a half-built development."

Back in Sugar Grove, municipal leaders at least appear to be listening. After all, infrastructure costs have already taken a toll on their village. In March 2006, Neumann Homes pulled out of a 975-acre mixed-use development, citing infrastructure costs and impact fees as a contributing factor.

In October 2007, Forest City let its option lapse on a proposed 211-acre project, which included retail and residential elements. The reason: Infrastructure needs and impact fees couldn't be absorbed amid the slowdown.

According to the city's community development director Rich Young, trustees are exploring a variety of options including lowering the open space requirement, relaxing the square footage requirements on homes, temporarily doing away with transition fees, and reducing impact fees.

"I think we'll see more municipalities going this route," predicts Duncan Associates' Mullen. "With times so tough on builders and developers, in some cases, they aren't getting paid for them anyway, so really, what have they got to lose?"

–Lisa Marquis Jackson

The Dirt

Toll Transactions

After buying development rights from Rosewood Home Builders, Toll Brothers is building 87 homes in a new subdivision in Halfmoon, Nev. Another 68-units neighborhood may follow in Colonie, where Toll has agreed to purchase development rights pending approvals.

Horton Clears the Air

According to the Maricopa County Air Quality Department in Arizona, D.R. Horton and its subsidiaries had the biggest air quality settlements for the month of June. Horton agreed to pay nearly $100,000 in fines related mostly to dust control violations from June 2006 to October 2007. Dust pollution is a priority because it contributes to the infamous brown cloud that hangs over the valley.

Land Loss

Naperville, Ill.-based Macom Corp. faces a foreclosure lawsuit on a 65-acre parcel of farmland located outside of Oswego, Ill. According to court records, the lender filed the suit after the developer loan missed payments. Although a project proposal has yet to be approved, zoning would allow for approximately 160 homes.

Mile-High Retreat

Dallas-based Centex Corp. will exit the Denver market by spring 2009, but vows to complete homes under construction in its 10 communities in the submarkets of Longmont, Fort Collins, Brighton, Thorton, Commerce City, Westminster, Aurora, and Castle Rock.

Got Some Dirt?

Please send any information regarding land transactions or upcoming developments in your marketplace to Lisa Marquis Jackson at ljackson@hanleywood.com.


Tucson, Ariz., takes on water conservation with new residential and commercial initiatives.

In high-growth states such as Florida, Arizona, and Texas, water increasingly has become an issue that has water management districts considering consumptive use permits and stringent watering requirements.

In an effort to proactively address sustainability, city officials in Tucson, Ariz., are implementing irrigation-related policies in new residential and commercial development projects. The ordinance will be put in place during September, and become effective June 1, 2010.

Last December, Tucson's city council adopted two new initiatives related to irrigation. One involved rainwater harvesting specific to commercial and mixed-use developments. The other: a similar conservation effort involving "gray water" for residential applications.

Gray water is generated from a home's bathroom or laundry sinks, showers, and washing machine. It's distinguished from "black water" as it contains significantly less nitrogen and far fewer pathogens.

Gray water use currently is allowed through the state on a general permit basis. It involves installing a plumbing system that processes the gray water separately to discharge it for use in residential landscaping. The Arizona Department of Environmental Quality (DEQ) says homeowners can engage in the practice, provided they follow a variety of conditions (specifics can be found online at http://www.azdeq.gov/environ/water/permits/download/rules/1.pdf).

Tucson's initiative is meant to ensure that every newly constructed house will be preplumbed to allow a homeowner to easily use a gray water system if he or she chooses to do so.

"We aren't mandating the use of gray water; it's already an allowed use," says Tucson's director of developmental services, Ernie Duarte, who adds that there are other communities throughout the Southwest taking advantage of the DEQ permit.

"We are merely mandating the pre-plumbing of gray water systems for people to use at a later date," Duarte says. "[If new homes] have provisions for ease-of-use or ease-of-future installations of gray water systems, then we could all reduce demand on potable water by making it easier for homeowners to put in a rainwater system, if they desire. I think Tucson is the only municipality [in the state] requiring an ordinance that builders put the [pre-plumbing] in the house as it is going up."

According to Duarte, it's clear why city officials should be focused on water conservation issues. "Tucson is in a desert; water is a precious resource," he explains. "The council recognizes that we have an opportunity to tap a free resource."

But while the resource itself may be free, a builder's ability to heed the new requirement is anything but. According to Duarte and city council member Rodney Glassman, builders are looking at a requirement that will cost up to $500 per home.

According to city officials, there have been 11 formal meetings held on the issue, and the incremental costs are not proving to be a deterrent. The initiative is being run through a community stakeholder process, which includes home builders, plumbing contractors, commercial developers, and landscape architects; according to council member Glassman, it has the agreement and support of everyone from the Southern Arizona HBA to the Sierra Club.

City officials claim a retrofit system would involve ripping up a home's floor

to install the pipes, and the pre-plumbing ordinance would save "a ton of money" for someone who wanted to move to a gray water system after move-in.

"It's a cost-effective way to ensure issues of sustainability can be addressed in the future," says Glassman, who not only has a specialized education in water issues, but also understands the home builder perspective after working at KB Home for four years. "It's about making green-ready homes–not with broad-sweeping mandates but with short-term economics in mind.

The city is simultaneously working on another ordinance requiring rainwater harvesting for irrigation use in new commercial and mixed-use developments. That effort is expected to pass in November and go into effect on June 1, 2010.

–Lisa Marquis Jackson

Learn more about markets featured in this article: Tucson, AZ, Phoenix, AZ.